A dyed-in-the-wool EU accounts scandal

Published in Business Spectator (Melbourne), 15 November 2012

As the European Union is mobilising hundreds of billions of euros to save the continent’s currency, it would be reassuring to know that it can be trusted with money. After last week’s annual report from the European Court of Auditors, there is little reason for such optimism.

The auditors’ assessment of the EU’s accounts is less than flattering: “The court concludes that the examined supervisory and control systems are partially effective in ensuring the legality and regularity of payments underlying the accounts.”

This may sound technical and benign until the auditors then list all the areas of policy in which they found serious accounting issues: “market and direct support; rural development, environment, fisheries and health; regional policy, energy and transport; employment and social affairs as well as research and other internal policies”. In other words, basically everywhere the EU spends money.

Altogether, the court estimates that the most likely error rate for payments was 3.9 per cent in the previous year, costing European taxpayers about €5.2 billion. As a result of these irregularities, the auditors refused to issue a formal statement of assurance – once again.

The shot across the bow from the Luxembourg based auditors has become a sad ritual. For the past 18 years, the court has been admonishing the EU Commission on an annual basis. But after all these years, do the court’s announcements make any difference?

What should be a scandal across Europe hardly even makes it into the newspapers – which is a pity, because the EU’s audit actually has real entertainment value. It is astounding how easy it is to wrongly access EU funds.

Claiming EU subsidies for non-existent sheep is one way to do it because this seems to be a common practice. In an example given in the report, a farmer had been granted a special premium to keep 150 sheep. Unfortunately, on closer inspection he did not have any sheep at all and therefore the payments he received had been ‘irregular’.

Another example mentioned by the court concerned subsidies available for permanent pasture – which then turned out to be covered by rocks, dense bushes or even forests. This did not only make them unsuitable for grazing but also ineligible for payments from the EU. Nonetheless payments were easily forthcoming.

Naturally, agriculture provides ample examples of accounting errors simply because it constitutes the biggest chunk of EU spending. However, other policy areas may be even worse. The European Social Fund, which is the EU’s main vehicle for employment and social policy, is also evidently riddled with problems.

It may sound bizarre, but when the ESF aimed to fund training courses to increase the qualifications of employees working in the electronics sector, the court found that “many of the participants were employed outside of the electronics sector and were therefore not eligible for such training”. Astonishingly, almost a third of the ESF’s spending on these training schemes went to ineligible participants. Apparently the ESF people had not been as switched-on as the would-be electricians whose training they were funding.

These were not the only problems observed in ESF’s practices. Project costs were incorrectly calculated; staff costs wrongly charged; compliance procedures not observed. Though that does not automatically mean that fraud or corruption was an issue in these cases, it is equally clear that EU funds were spent and administered with the grossest level of negligence.

A total payments error rate of 3.9 per cent may not sound too dramatic, but the court also provides an alternative estimate of the accuracy of the EU’s accounts by measuring the “share of audited transactions affected by one or more quantifiable or non-quantifiable error”.

On this measure, for all EU spending, the “error frequency” was a staggering 44 per cent. The least error-prone area was actually administration, where only 7 per cent of transactions were affected. For regional policy, energy and transport, on the other hand, the share was 59 per cent.

To be fair to the EU, it is not solely responsible for the errors detected by its auditors. About four fifths of all EU spending is administered by national authorities. If mistakes are made, or featherbedding practised at the national level, the first responsibility lies with the member states for incorrect or ‘irregular’ spending. Nevertheless, after decades of experience with lax procedures at the national level, one might have hoped that the EU would apply more control itself.

The annual auditing debacle is symptomatic for the state of the EU as a whole. Somewhere between the Commission in Brussels and the fictitious sheep in Spain, the chain of accountability breaks down. EU policies may have been well-meaning and full of good intentions, but as long as good governance is only fitfully applied across the continent, the system will not work as well as Europe’s taxpayers may rightfully expect.

Training ineligible workers, claiming farming subsidies for dense forests or rocky bushland, or simply not following procurement rules all show the same disrespect for rules and laws that plagues the entire European edifice. The European Monetary Union, with its ignored debt and deficit rules or its no-bailout principle, is the constant reminder of this problem.

After 18 years of damning reports from the EU’s Court of Auditors, it is hard to say what is worse: the ongoing irregularities in the way the EU spends its funds? Or the fact that this state of affairs has become so normal that hardly anyone takes notice anymore?